The Improving Housing Market - Should You Buy Now?

Is the housing market in a definite upswing nationally? If you have held off buying a home, is now the time to act before prices go much higher?

Over the past year housing market observers of various stripes –analysts, economists, professional money managers and real estate professionals- have all cautiously noted what appeared to be a nascent housing recovery, one broad based geographically. Robust improvements in housing starts numbers over the past several months have been significant enough that the adjective nascent may no longer be applicable. According to the Wall Street Journal, a housing start is defined as the beginning of excavation of the foundation for a construction intended primarily as a residential building. Housing starts hit 894,000 in October, exceeding analysts’ expectations by more than 50,000. This continues a trend going back a number of months of strong, and at times vigorous, increases in residential construction throughout the country, with September 2012 housing starts showing a 34.8% year-over-year increase. These numbers, among others, indicate that there is a strong, sustained recovery within the housing market that can be projected with some confidence into the near future.

This conclusion is buttressed by a broader index compiled by Fannie Mae called the National Housing Survey, conducted on a monthly basis in an effort to assess attitudes toward owning and renting a home, mortgage rates, homeownership distress, the economy, household finances, and overall consumer confidence. Despite the uncertainty surrounding the Fiscal Cliff, this survey illustrates increasingly strong consumer confidence. According to Doug Duncan, senior vice president and chief economist of Fannie Mae, “Consumer attitudes toward both the economy and the housing market continue to gather momentum, with many of our 11 key National Housing Survey indicators at or near their two-and-a-half-year highs.”

In spite of the promising data, Ben Bernanke, chairman of the Federal Reserve, warned in mid-November that the housing market is "far from being out of the woods," and blamed, in part, overly tight lending standards. He termed these standards as an appropriate response to the housing crisis, but stressed that with the crisis in the past, banks now need to be willing to lend to a broader base of customers than they have during the previous four years, saying that “…overly tight lending standards may now be preventing creditworthy borrowers from buying homes, thereby slowing the revival in housing and impeding the economic recovery." Bernanke emphasized that the Federal Reserve would continue doing everything within its mandate to help the recovery including the continuation of the ongoing third round of quantitative easing or QE III that is currently engaged in buying $40 billion worth of mortgage backed securities (MBS) every month.

Others were more specific in their critique of the housing market numbers of recent months, pointing out that the housing start levels of October, while representing the highest totals in four years, were similar to levels during the recessions of 1981 and 1991 and remain 60% below the housing start numbers of January 2006. Additionally, concern was voiced regarding the primary driver of the spike in housing start totals, the initiation of construction of multifamily homes intended primarily as rentals. Typically these types of structures are owned by investors, not by new home buyers, and while a growth in housing construction cannot be construed as anything but positive, it does support the belief that consumers are still more focused on rentals than on purchases; the number of multifamily housing starts are up 63% year over year, while the number of single family housing starts, homes that are typically purchased, not rented, are flat over the same time period. Posited reasons for these trends include the still weak economic recovery, the struggling jobs market, uncertainty over future fiscal policy and the possibility that mortgage interest rate deductions will be eliminated as part of the Fiscal Cliff negotiations.

So how can consumers and investors take advantage of the current context? If you are well positioned enough financially to qualify for a mortgage in this restricted lending environment, buying a home would represent an ideal investment. With consumer confidence on the rise, the volume of real estate purchases should increase. This, in turn, should lead to a hike in interest rates due to the increased demand for mortgages. This rise in interest rates will likely be mitigated, however, by the Federal Reserve’s stated intention to keep rates artificially low via the deployment of open market operations through the end of 2014. This leaves a window of approximately two years where home buyers or investors should be able to take advantage of lower rates with which to finance their purchase.

Find and compare mortgage rates where you are looking to buy.

Michael Cancella
Michael Cancella: Michael Cancella graduated magna cum laude from Columbia University with a B.A in History in 2010. After graduating he worked in the finance industry at a hedge fund startup and is currently going through the CFA Program in an effort to broaden his knowledge of finance and the economy. Prior to returning to school to finish his degree at Columbia, he spent a number of years i


  • Sol

    December 15, 2012

    I would wait to see what happens to the mortgage deduction, especially for more expensive homes with larger mortgages. Prices will come down if the deduction is eliminated.

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